Not all information is useful information

Investopoly

Not more than 7 months ago, according to the media, investing in property was no longer a smart way to build wealth. Labor wanted to ban negative gearing, increase Capital Gains Tax (CGT), commentators were predicting that the market would crash by more than 20%, banks were tightening lending standards and so on. Since then, the world has returned back to 'normal' and most of these concerns have abated. According to the media, property is now a good investment again. But what if Labor had won? Of course, Labor losing the federal election in May 2019 did help the property market because it meant any changes to negative gearing and CGT were off the table. However, if it had won the election, I doubt Labor would have been able to get these proposed changes legislated. And even if they did get them legislated, I stand by my view that whilst these changes would have materially reduced after-tax returns, it would not have rendered property investment uneconomical. In the long run, investing in the right property still would have been a viable investment. Construction of new housing, recession, interest rates... I was reading an article by an investment manager that I respect greatly a few weeks ago. His thesis was that it was too early to call a recovery on the property market because of the fall in construction volume (of new dwellings). He went on to explain that a depressed construction market will create negative consequences for economic growth, unemployment and therefore property. Whilst I don't disagree with this author's economic reasoning, I was left pondering what use this information had to an investor. That is, if I'm contemplating an investment in a blue-chip, investment-grade location, do I care about the fall in new construction (which inevitably occurs in locations far removed from investment-grade locations)? So, what information is relevant then? In reality, much of the content produced by the media is relatively useless for making property investment decisions. The media tend to only run stories that they consider newsworthy. Newsworthy often means that the information is time-sensitive e.g. what happened yesterday or what will happen tomorrow. This short-term information does not help if you intend to own a property for many decades. Remember what drives property values A good and bad property cost the same to hold. You will pay the same amount of interest in respect to the mortgages. And the income and expenses will be relatively similar. The biggest difference between a good and bad property is capital growth. That is, what will the property be worth in 10, 20 or 30 years? In this regard, when selecting a property, there are three things you must consider: 1. Land value Land appreciates whereas buildings depreciate. Therefore, it stands to reason that you should invest in properties that are mostly land value which typically includes houses and older-style apartments. Whereas, if you invest in a newly built property, it is likely most of the purchase price will represent building value and only a small land value component. The appreciation in land value needs to more than offset the depreciation in building value for the property's overall value to increase. But this is unlikely if say, 80% of the value is building (and depreciating) and only 20% land (and appreciating). 2. Scarcity The property must be scarce both in terms of location and property type. A scarce location is one where there is a finite amount of vacant land (often no vacant land) plus the location is highly desirable to a broad spectrum of demographics (e.g. young people, families, retirees, etc.). A scarce property type is...